Regulatory Tournaments and Social Norms

Regulatory agencies seek to ensure compliance with regulations for which they are responsible. Arguably agencies seek to maximize aggregate compliance, constrained by limited resources. The use of regulatory tournaments helps agencies to increase aggregate compliance. Under a tournament, agencies rank regulated facilities based on their extent of compliance and then inspect and take enforcement actions against the less compliant facilities. When used, tournaments imply that the compliance histories of other facilities influence the enforcement and monitoring pressure inflicted on a given individual facility. Thus, there exists an indirect effect of other facilities’ compliance history on a given facility’s discharge decision via the inspection of this individual facility. Specifically, other facilities’ compliance histories influence the current inspection of a facility and then the current inspection of this facility influences future discharges from this same facility. As important, social norms affect individual facilities’ compliance with regulations. For example, if other facilities’ regulatory compliance improves, an individual facility is compelled to improve its own regulatory compliance in order to maintain its social standing. Thus, there also exists a direct effect of other facilities’ compliance history on a given facility’s own compliance. Our study examines the overall effect of other facilities’ compliance history – both direct effect and indirect effect – on an individual facility’s extent of compliance. For our empirical analysis, we explore U.S. chemical manufacturing facilities’ compliance with wastewater discharge limits imposed under the U.S. Clean Water Act.